MPs accuse Carillion of trying to 'wriggle out' of pension obligations

In a letter published by the committee on Monday, chair of Carillion defined benefit pension scheme trustees Robin Ellison said the trustee sought to agree higher contributions for Carillion’s schemes for each of the 2008, 2011 and 2013 valuations.

Once again, TPR has questions to answer. They have been sniffing around Carillion – at the trustees’ behest – since at least 2008, though it is not apparent to what effect

Frank Field, Work and Pensions Committee

The trustee and company were not able to come to an agreement on the 2008 and 2011 valuations due to the trustee seeking to “take a more prudent approach to funding than the company considered it could afford”.

The trustee reported this to the Pensions Regulator, but the letter highlighted that, while the watchdog had been involved since 2008, there was little sign of active intervention.

The last formal covenant report, obtained in May 2017 in preparation for engagement with Carillion on the results of the 2016 valuation, indicated potential weaknesses in the company’s debt position, “but still concluded that it had scope to increase the amount being paid in pension contributions”, Ellison said.

Lack of information

The board received regular updates through quarterly reporting on covenant metrics and “information on events potentially notifiable to the Pensions Regulator”.

Until 2017, the information made available to the trustee and its covenant assessor had been “largely that available in the public domain, and the trustee had no legal power to require additional information to be provided”, Ellison said.

He said that the deficit of the main five schemes was “nearer £2bn” on a buyout basis, and the 2016 valuation came up with a technical provisions deficit of around £990m.

Striking a balance

Carillion could not borrow in September 2017 unless it secured agreement to a deferral of pension contributions. The trustee and the regulator agreed to defer the contributions, to be repaid in full, with interest, by the end of January 2019.

The trustee agreed to this because it was clear the banks saw the trustee agreeing to the request as an integral part of them committing to providing new money to Carillion.

Balancing a company’s need to grow and invest with its ability to fund its pension scheme is a contentious issue, and the disparity between dividend payments and deficit contributions has played a big part in discussions concerning DB security and sustainability.

Martin Hunter, principal at consultancy Xafinity Punter Southall, said: “The difficulty I have is seeing how legislation could be changed to better achieve that balance”.

One option could be that a company must contribute to its scheme or seek clearance from the regulator before paying dividends, said Hunter. However, these potential solutions would not be welcome among businesses, and would present resource problems for the regulator.

Wriggling out of obligations

Commenting on the trustee’s response, chair of the committee Frank Field said: “It’s clear that Carillion has been trying to wriggle out of its obligations to its pensioners for the last 10 years. The purported cash flow problems did of course not prevent them shelling out dividends and handsome pay packets for those at the top. This culminated in negotiating deficit contributions away entirely last autumn to enable more borrowing. Remarkably, this was endorsed by the trustees and the Pensions Regulator.”

He added: “Once again, TPR has questions to answer. They have been sniffing around Carillion – at the trustees’ behest – since at least 2008, though it is not apparent to what effect. When 10 years later the company collapses with £29m in the bank and £2bn in pension liabilities it doesn’t look good for them.”

On Tuesday, the Business, Energy and Industrial Strategy Committee and Work and Pensions Committee's joint inquiry questioned Ellison.

During the session, Ellison said: “My understanding was that Carillion was considered one of those schemes [the regulator] wanted to keep an eye on pretty much early on.”

The committees have also written to accountancy firms KPMG, EY, PWC and Deloitte, asking for details of any and all services the firms have offered Carillion, its subsidiaries and its pension scheme, over the last decade, and what fees they were paid. The four companies are expected to provide a full reply by Friday 2 February.

Unite, the UK’s largest union, wants all possible legal avenues to be explored to recoup money, and has called for the introduction of stronger laws to prevent future scandals.

Following Carillion’s collapse, 28,000 defined benefit members are set to transfer into the Pension Protection Fund. 

Unite assistant general secretary Gail Cartmail said:"Every legal avenue needs to be explored to discover if money can be reclaimed... The Carillion crisis demonstrates once again that existing pension laws are far too weak. The actions of the pension regulator need to be urgently reviewed and if necessary its powers strengthened.

Regulatory intervention

In a letter to the Work and Pensions Committee, dated January 26, the regulator said it is “in contact” with the Financial Conduct Authority, Financial Reporting Council and Insolvency Service to determine what happened and what regulatory action may be appropriate.

Field said the regulator’s investigation "is much too late for the pensioners, who will inevitably now receive reduced benefits through the PPF, and too late for the PPF levy payers, who will pick up the tab”.

“The Pensions Regulator has been aware of problems in Carillion since at least 2008 but there is little evidence of any hard action... They need legislation – not words – from government to sort this out.”

While it is obviously too late for the regulator to use its section 231 power to enforce a schedule of contributions with regard to Carillion, the watchdog has launched an investigation in relation to the schemes to determine if there is information that suggests it should use its anti-avoidance powers.

As for details on whether the watchdog will get new powers, the industry will have to wait for the government’s white paper, due in spring.

In its response to last year’s green paper the watchdog said it would remain open to proposals that would seek to strengthen its clearance powers and allow it the opportunity to prevent activity that is not accompanied by measures to alleviate negative scheme impact before it happens.

A spokesperson for the regulator said: “The current regulatory framework attempts to balance the needs of a scheme and its members with the needs of an employer to invest in their ongoing business – this should be reflected in the length and structure of the recovery plan. TPR does not approve recovery plans – it is for the trustee and employer to agree them.

“The content of Carillion’s recovery plans, and its payment of dividends, did not highlight sufficient concern to justify the use of our powers based on the group’s trading strength as presented at the time in their audited accounts. However, it is clear from the company’s announcements since July that their underlying profitability was significantly weaker than market understanding or the position set out in prior year accounts.”